The demand for labour, marginal productivity theory Flashcards
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What type of demand is labour?
Derived demand
What is meant by labour being derived demand?
It means that the demand for labour comes from the demand for what is being produced
What will firms base their demand decisions for labour on?
Marginal Revenue Product (MRP)
Define MRP
The extra revenue generated when an additional worker is hired
How do you calculate MRP?
MRP = MPP (Marginal (Physical) Product) X MR (Marginal Revenue)
What is the marginal product of labour?
The additional output each unit of labour can produce
What is the marginal revenue of labour?
The additional revenue derived per extra unit of labour
How does the MRP relate to the demand curve?
The demand curve shows the MRP (MRP=D)
For an individual firm, why is the (labour) demand curve the MRP curve?
At any given wage rate, the MRP curve tells us the quantity of workers a given firm should employ, hence it is the demand curve
Why does the Labour Demand Curve slope downwards in the SR?
- In the short run the labour demand curve is downward sloping due to the law of marginal dimisnishing returns.
- This is significant because it means the marginal revenue product (MRP) curve follows the same pattern as the marginal product curve.
Define the law of marginal diminishing returns
The law of diminishing returns states that in the short run (where there is at least one fixed factor of production), as variable factors of production are added to a stock of fixed factors of production, total/marginal output will initially rise and then fall.
Up until what point will a profit maximising firm employ workers?
Up until the MRP of the last worker hired is equal to the wage rate.
Therefore what does a workers MRP determine?
Whether they will be employed or not at a given wage rate by a firm
i.e. the MRP curve is the demand curve for labour in the short run.
What is the marginal productivity theory of the demand for labour?
It suggests that firms will only demand workers if the MRP of the workers is at least equal to the wage rate
–> i.e. workers are paid according to MRP and the number of workers firms will employ is determined by MRP
Therefore measuring and mapping MRP provides info regarding employment at different wage rates
Give 4 evaluative/criticism points of the MRP theory
1) Difficult to measure productivity and MRP in jobs such as nursing and teaching as nothing physical is being produced. Therefore, the idea that employment is decided based on MRP may not hold
2) Many jobs in the real world are not individual; they are teamwork based. This makes it very difficult to measure the MRP of each individual worker and therefore for firms to use MRP to make efficient employment decisions
3) The existence of trade unions can create imperfections in the labour market, ignoring the profit maximising condition, which determines employment for firms, instead forcing up wages using collective bargaining and demanding more employment using strike action as a threat. This way, trade unions work against the idea of a downward sloping demand curve where employment is based on MRP at a given wage rate.
4) MRP theory suggests that rational profit maximising employers will only pay workers a wage equal to worker MRP, never more and sometimes less. This theory does not hold for the self-employed who may pay themselves much more than their MRP as their objectives are clearly different to a larger scale profit maximising corporation.